Build Your Profits With Hovnanian (HOV) Options

by Ian Harvey | September 6, 2013 9:42 am

Build Your Profits With Hovnanian (HOV) Options

After a long and painful downturn in the housing market, home prices in many regions of the U.S. are showing signs of recovery, and thanks to institutional investors, the U.S. housing market has been driven upward. A large number of companies rode the recent housing recovery wave; KB Homes (KBH[1]) and D.R Horton Inc. (DHI[2]) are two such companies that have reported fiscal third-quarter profit that beat analysts’ estimates as demand for homes increased.

Hovnanian Enterprises (HOV[3]), a leading national homebuilder, will release financial results for the third quarter ended July 31, 2013 the morning of Monday, September 9, 2013, and it is expected that they will join the ranks of the high performers.

Bearishness Provides Profitability

Recently, many investors appear to have taken quite a bearish approach to Hovnanian Enterprises,especially when looking at the percentage of the float that is sold short for this stock. Currently, 31.22% of the float is sold short, suggesting an extreme level of bearishness for HOV.

However, it is worth noting that earnings estimates have actually been moving higher for the company, despite the pessimism. Thanks to these rising estimates, it is a clear that this belief in the negativity surrounding this firm is not applicable, and instead look for shares of HOV to move higher in the weeks ahead. Also, this negativity is quite fortunate as it now makes this call options trade entry price more favorable.

Also, analysts expect Hovnanian Enterprises to rally after a loss of five cents a year ago. Profits for the company are expected to come in at six cents per share.

Past Earnings Reflection

Hovnanian Enterprises last released its earnings data on Wednesday, June 5. The company reported $0.01 earnings per share for the quarter, beating the analysts’ consensus estimate of ($0.05) by $0.06. The company had revenue of $423.00 million for the quarter, compared to the consensus estimate of $408.61 million. During the same quarter last year, the company posted ($0.14) earnings per share. Hovnanian Enterprise’s revenue was up 23.8% compared to the same quarter last year.

Expected Earnings Looking Good

Click to EnlargeFor the fiscal year, analysts are projecting earnings of 15 cents per share. Revenue is projected to be $504.7 million for the quarter, 30% above the year-earlier total of $387 million. For the year, revenue is projected to come in at $1.86 billion.

Revenue has seen growth for three consecutive quarters. In the second quarter, revenue rose 9% to $423 million while the figure rose 33% in the first quarter from the year earlier and 43% in the fourth quarter.

Last quarter’s profit snapped two straight quarters of losses.

Analysts Are Confident

A number of research firms have shown their support for Hovnanian Enterprises:-

Analysts at UBS AG upgraded HOV from a “neutral” rating to a “buy” rating on August 14. They noted that the move was a valuation call.

On the ratings front, analysts at Zacks upgraded shares from a “neutral” rating to an “outperform” rating on August 6. They now have a $6.70 price target on the stock.

Finally, analysts at Thomson Reuters/Verus upgraded shares from a “hold” rating to a “buy” rating on July 29.

Recommendation

Since the economy appears to have been improving, the housing recovery is underway, analysts are showing confidence and an upbeat earnings report is expected – than the following call options trade is applicable….

OPTIONS TRADE: Buy the HOV Jan 2014 5.000 call (HOV140118C00005000[4]) at or under $0.70, good for the day. Place a protective stop limit at $0.30 and a pre-determined sell at $1.10 for potential upside of 57%!